Case Study: Netflix vs. Blockbuster

There are many relevant, and certainly constructive, case studies that shed light on the challenges faced in digital transformation and the pitfalls in underestimating its importance to how we do business and engage customers. One of the more famous stories of digital disruption and the battle for market leadership involves Netflix and Blockbuster. It was a classic battle of old versus new technology, of flexibility versus rigidity of business models, and, ultimately, of corporate culture. Blockbuster, once the largest video rental company in the US with a hefty international presence and worldwide revenues of $6 billion, lost big and a major reason was due to Netflix’s visionary digital strategy.

Founded in 1997, Netflix began operations by offering DVD rentals and sales. At the time, DVDs were a new format. Rather than establishing brick and mortar retail locations with VHS tapes, Netflix delivered movies by mail, which was both a disrupting idea and well-suited to the new, sturdy and slim DVD format. To deliver its DVDs into the hands of its customers, Netflix invested in warehousing and distribution. By early 2000, Netflix’s traditional pay-per-rent business model, the same model used by rival Blockbuster, was replaced by a monthly subscription-based revenue model where you placed movie titles in a queue, receiving unlimited DVDs throughout the month with the sole limit on the number of DVDs you could borrow at any one time. Netflix allowed you to keep the discs for as long as you wanted. Their revolutionary idea was that customers received new movies when the old ones were returned – with no due dates or late fees. This further cemented Netflix’s reputation as an industry disrupter, breaking with the industry’s way of doing business on a pay-per-rental basis, effectively taking on the home video sales and rental industry. In one fell swoop, by eliminating due dates and late fees, Netflix found a way to give customers what they truly longed for, setting the stage for future growth and dominance of the entire industry.

In 2000, the founder of Netflix flew to meet Blockbuster’s CEO and team. During the meeting, Netflix proposed that it be acquired by Blockbuster for $50 million[1], recommending the companies join forces. Netflix would manage Blockbuster’s online brand and Blockbuster would promote Netflix in stores. At the time, Blockbuster was at the top of the video rental industry and the company balked at the idea of partnering with an upstart. They refused to move away from physical retail stores (in the years that followed they doubled down on their retail store strategy) and they rejected the idea of eliminating their late fees. Perhaps more tellingly, they rebuffed the idea of moving toward a digital platform. The company hadn’t yet understood how vital the digital platform would be to its survival.[2]

Just a few years later in 2004, Blockbuster’s CEO at the time, John Antioco, finally recognized that Netflix and others had altered the movie rental landscape and decided to invest heavily in the digital platform, planning to spend $200 million to launch Blockbuster Online. Under Antioco, Blockbuster likewise planned to eliminate late fees, at another $200 million investment.[3] Up until this point in time, even though late fees were a major customer irritant, Blockbuster, with its thousands of retail locations, millions of customers and massive marketing budget, had until then relied on these fees as a key source of revenue. It’s easy to see how these planned investments would have negatively impacted Blockbuster’s bottom line in the short term. The company’s board moved against Antioco. He lost their confidence and left the company by July 2007. The new CEO reversed Antioco’s changes, in an unsuccessful attempt to increase profitability, but Blockbuster, the once unbeatable company, declared bankruptcy in 2010.

Netflix, in contrast, continued to invest in digital technology, eventually moving to video on demand via the internet, betting big on broadband adoption and customer appetite for streaming digital content. Netflix’s streaming business was such a success that it rebranded itself around video on demand. Today, Netflix, worth $71B in market cap[4], is “the world’s leading internet television network with over 100 million members in over 190 countries enjoying more than 125 million hours of TV shows and movies per day… Members can watch as much as they want, anytime, anywhere, on nearly any internet-connected screen.”[5]

Lessons Learned

Much has been written on Blockbuster’s demise and there are certainly several important lessons to be learned. We see Blockbuster’s biggest failure to be its initial refusal to see how digital transformation would impact its future. That, coupled with the company’s failure to identify and provide what its customers truly wanted (a better experience with no late fees), paved the way for its nimble opponent, Netflix to disrupt the industry and become the market leader. Digital transformation of an entire industry can happen quickly, and Blockbuster’s misreading of the trend for video rentals to go digital was fatal. Once Blockbuster missed the mark, it was unable to recover.

It’s easy to understand how Blockbuster was overly entrenched in its traditional business model to see that the future was not in a strong store network, but rather in bypassing the retail store experience and in delivering movies to its customers directly in their homes. With its market leadership and billions in revenues sourced from a soon-to-be obsolete strategy, Blockbuster was unable to assess correctly the new opportunities and threats that Netflix presented. As a globally successful brand and video rental incumbent, Blockbuster additionally overestimated its ability to compete with Netflix once it did decide to go digital. Having a strong brand does not ensure that your company will be able to compete effectively against digital transformers, no matter what their size – and yours.[6]

So, create a roadmap for your company’s future survival. Changes are swift and unforgiving in the digital age. Be aware how changing technology can meet your customers’ needs better and faster and plan accordingly. Know that some of today’s niche opportunities might become vastly more attractive, even disruptive. In this information age, new ideas can go viral before you have time to react. Be a visionary. Revisit your brand’s strategy regularly. And, don’t let current success blind your ability to assess market opportunities and threats posed by new entrants.